Will Draghi be Yellen about policy?

Yesterday offered very little to get excited about with markets in a holding pattern ahead of Jackson Hole which carries key event risk. There are key speeches due today from Mario Draghi and Janet Yellen and markets are waiting to see what comments the central bankers will have on policy. Stocks in Europe were slightly higher, in the US indices were mixed but broadly the day felt more or less flat while overnight is was also a rather subdued session.The USD index traded slightly higher on the day, while GBP was also moderately firmer after clawing back some on the weeks/months losses, against the euro, while holding above support at 1.2770 in GBPUSD. GBP was initially lower on the day following the release of GDP data confirming the UK remains the weakest performing economy of the G7, however selling was short lived and the pound recovered through the mid-morning.

Today our focus will be heavily on the Euro. There have already been a number of releases from Germany, with GDP as expected but weaker imports and exports, as well as a slight decline in capital investment saw the Euro face some light selling in early morning trade. We have just seen the release of the IFO business climate report, and while the headline figure is slightly stronger, the current assessment was weaker at 124.60. However the key for the Euro and its strength has been the markets expectations the ECB will be scaling back easing. We feel market has tried to front run the ECB and in fact misinterpreted the ECB’s guidance thus far and while Draghi was relatively quiet on Wednesday, we’ll be looking for him to provide some clarity on the ECB’s intentions late this evening. We see the risk to the Euro to the downside here, given how much positivity is priced into the single currency, any hint or dovish tone will initiate Euro selling and in fact concerns are, should Draghi not be full out hawkish on policy and tapering then the euro will react negatively. EURUSD continues in major range, 1.1828 down to 1.1728 area, while a break below 1.1661 should open additional downside for EURUSD. EURGBP resistance to topside comes in at .9235 while light support at .9191 held this morning,.

The USD index continues to languish at its lowest levels for the last two and half years and little seems to give the greenback much of a boost. Durable goods orders are due to be released today and the expected 6% decline will not help the USD gain any traction but once again most focus will be on Janet Yellen and what she has to say at Jackson Hole. The US economy is feeling the slowdown which some may attribute the rising rate environment as well as the lack of real progress on Trumps larger plans for the economy which has seen outlooks diminish. However, should Yellen discuss raising rates again this year then the dollar has scope to rally, however it is likely any discussion on policy may well be related to how they will shrink their balance sheet. GBPUSD still finds support at 1.2770, while rallies towards 1.2840 will finds some sellers and light resistance.

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